Interoperability across nations
CBDCs can be broadly classified into ‘Wholesale’ and ‘Retail’, based on the key stakeholders and the proposed functionality of the currency. Wholesale CBDCs relate to the issuance of a CBDC to be used only between the central bank and other entities (mainly financial institutions) which have an account with the central bank for use in interbank payments and securities transactions.
Bilateral Cross-border payments can improve significantly through individual CBDC initiatives through a synchronization of payments across multiple legs in this transfer and a simultaneous locking of funds across the payment chain. Many such central bank led bilateral initiatives are already being piloted between different countries and this seems to be the way forward in the near term. On a related note, private sector initiatives that offer the similar benefits are also underway, with Ripple claiming to have over 300 financial institutions on their network and SWIFT also establishing newer standards through their gpi (global payments innovation) initiatives.
A truly scalable cross-border multi-CBDC model would require a platform that can enable interoperability for many central banks to work together. One option to implement this is through defining common technology and standards, such as message formats, security, and data requirements as well as aligned legal, regulatory, and supervisory standards that could reduce the operational burden of participating in multiple bilateral systems.
The other possibility is creating a single system with multiple CBDCs where CBDCs could be issued onto a common distributed ledger. This has also been named a hub and spoke model, in which central banks issue their CBDCs on a single common platform and participants on the network could directly transact using the different CBDCs. Such a platform would have a core blockchain layer that will hold the data and the smart contract logic, an application layer where functionalities such as issuance and redemption are provided, and a front-end that provides the interface into the core systems and functions.
At a large scale, the issues of governance and ownership of such a platform must be ascertained. In any case, such global initiatives take a lot of time, what with ISO 20022 being launched in 2004 and SEPA taking decades. However, some of these initiatives are already being tried out, the most promising of which is the mBridge initiative where the participating countries are China, Hong Kong, Thailand and the UAE.